COMPARATIVE ADVANTAGES OF VIETNAMESE AGRICULTURAL PRODUCTS CASE STUDY OF COFFEE PRODUCT IN DAKLAK PROVINCE, VIETNAM

Ngo Thi Thuan, Hanoi University of Agriculture, Vietnam 2009 – 2010 Pole de Formation Spécialisée PFS CUD MASTER THESIS IN INTERNATIONAL MASTER IN RURAL ECONOMICS AND SOCIOLOGY Comp

POLE DE FORMATION SPÉCIALISÉE (PFS) - CUD

ASSOCIATION IN TRAINING BETWEEN HUA (VIETNAM) AND ULG (BELGIUM)

NGUYEN VAN THICH

MASTER THESIS IN INTERNATIONAL MASTER

IN RURAL ECONOMICS AND SOCIOLOGY

HANOI – 2010

Promoter: Associate Prof Doctor Ngo Thi Thuan,

Hanoi University of Agriculture, Vietnam

2009 – 2010

Pole de Formation Spécialisée (PFS)

CUD

MASTER THESIS IN INTERNATIONAL MASTER

IN RURAL ECONOMICS AND SOCIOLOGY

Comparative advantages of Vietnamese

agricultural products: Case study of coffee product in Daklak province, Vietnam

Nguyen Van Thich, Daklak Province, Vietnam

I am so thankful for the organization, help, enthusiasm and warm consideration of Prof Lebailly, Prof Dang Vu Binh, Doctor Vu Dinh Ton and all other staffs of project in the duration of the course work

I sincerely thank to my colleagues in the Tay Nguyen University who have been kindly provided me materials and professional suggestions for the thesis and given me help in organizing and completing the fieldwork

I would like to give many thanks to the staffs of Daklak DARD, Local Committees in Krong Pak, Buon Don and Krong Buk district for their cooperation and help during my fieldwork

My thanks also go to all the households and other people that participated in

my study in Krong Pak, Buon Don and Krong Buk district This study would have been not possible without their willingness and contribution

I also would like to send my thanks to all of my classmates for their sharing, comment and assistance during the course

Finally, I am so grateful to my family, my wife who always give me their encouragement, care and support

I have the responsibility for this study and it reflects my own viewpoint

Nguyen Van Thich -Tay Nguyen University – Vietnam

TABLE OF CONTENTS

INTRODUCTION 1

1.1 The necessity of the study 1

1.2 Objective 2

1.3 Research questions 2

1.4 Targeting and scope of the study 3

1.4.1 Targeting of the study 3

1.4.2 Scope of study 3

1.5 Structure of the report 3

LITERATURE REVIEW 4

2.1 Comparative advantage theory 4

2.2 The common features of international agricultural market 7

2.2.1 An overview of the world market 7

2.2.1.1 Supply and demand 7

2.2.1.2 Coffee price movements since 1960s 8

2.2.2 Impact of liberalization on coffee product 9

2.2.3 Opportunities and challenges for Vietnamese coffee product 14

2.3 Overview of previous research 15

SITE AND METHODOLOGY OF RESEARCH 17

3.1 Overview about research sites 17

3.1.1 Natural conditions 17

3.1.2 Socio-economic conditions 18

3.1.3 Roles of coffee production in DakLak province 18

3.1.4 Households selection 22

3.2 Data collection method 23

3.2.1 Desk study 23

3.2.2 Primary data 23

3.2.3 Secondary data 23

3.3 Methods of Competitiveness assessment 24

3.3.1 Production Functions (Cobb Douglas) 24

3.3.2 Comparative Analysis 24

3.3.3 Marketing structure 26

3.3.4 Policy analysis 27

3.4 Research Parameter 27

3.4.1 Domestic resource cost 27

3.4.2 Cost and Price of coffee product 27

3.4.3 Some other parameters 28

3.5 Limitations of the study 28

RESEARCH RESULT AND DISCUSSION 29

4.1 Overview of the production, consumption and trade of Vietnamese Coffee 29

4.1.1 Overview of coffee production in Vietnam 29

4.1.2 Coffee consumption 32

4.1.2.1 Domestic coffee consumption 32

4.1.2.2 International coffee market and consumption 33

4.1.2.3 Coffee marketing system in Vietnam 34

4.1.3 Overview of coffee production households 35

4.1.3.1 Coffee production of households 35

4.1.3.2 Performance and efficiency of coffee production in the survey

household 37

4.1.3.3 Cost of coffee production 38

4.1.3.4 Analysis of Cobb-Douglas function 40

4.1.4 The competitiveness of coffee 42

4.2 Analysis of Comparative advantages of Daklak’s coffee 43

4.2.1 Steps of calculation 43

4.2.2 Method of conversion and compute financial prices to economic price

43

4.2.2.1 Social price of output 43

4.2.2.2 Social price of tradable input 44

4.2.2.3 Exchange rate regime 46

4.2.3 DRC calculation 46

4.2.4 Sensitivity of DRC ratio for coffee 48

4.3 Main factors affecting of Comparative advantages of Daklak’s coffee 52

4.3.1 The quality of coffee 52

4.3.2 Secondary processing 52

4.3.3 Effect of exchange rate 53

4.4 Solutions to improve Comparative advantages of Daklak’s coffee product 54

4.4.1 Increase coffee quality and decrease production cost 54

4.4.2 Extending of scale of coffee plantations 55

4.4.3 Intensive promotion trademark 55

4.4.4 Appropriate policies from the authority 56

4.4.5 Improving competitiveness 56

CONCLUSION AND RECOMMENDATIONS 58

5.1 Conclusion 58

5.2 Recommendations 60

REFERENCES 61

APPENDICES 63

LIST OF TABLES

Table 1: Planted area of Daklak perennial industrial crops 20

Table 2 The total of coffee plantation areas of Vietnam and Daklak province (1995-2008) 31

Table 3: Top ten markets for Vietnamese green coffee exports in 2009 33

Table 4 :Coffee exports of Daklak province 34

Table 5: Coffee area, yield and total output of the survey households 36

Table 6: Comparison of coffee production performance between districts 37 Table 7: Average cost of coffee production per hectare in surveyed areas 38 Table 8: The estimated results of the impact of input on technical efficiency in coffee production in Daklak province 40

Table 9: Domestic Resource Cost for coffee, Daklak province 47

Table 10: DRC sensitivity with changes in coffee export price 49

Table 11: DRC sensitivity with changes in coffee productivity 50

Table 12: DRC sensitivity with changes in cost of some imported inputs 50

ACRONYMS AND ABBREVIATIONS

DARD Department of Agriculture and Rural Development

SER Shadow exchange rate

OER Official exchange rate

FOB Free on board

CIF Cost, insurance and freight

DRC Domestic resource cost

EU European Union

FAO Food and Agriculture Organization

GDP Gross domestic product

ICA International Coffee Agreement

ICARD Information Centre for Agricultural and Rural Development ICO International Coffee Organization

MARD Ministry of Agriculture and Rural Development

IC International cost

GO Gross output

MI Mix income

VA Value added

NPK Nitrogenous, Phosphorous and Potassium

USD United States Dollar

VND Vietnamese dong

WTO World Trade Organization

VICOFA Viet Nam Coffee and Cocoa Association

VINACAFE Viet Nam Coffee Corporation

Ha Hectares

Exchange rate

US$1 = VND 17,103 (Approximate; as of December 2009)

A study was carried out in 2009 to investigate Daklak’s competitiveness and comparative advantage in coffee production using gross margins, competitive advantage ratios and domestic resource cost ratios Secondary data were used in the analysis Gross margin for coffee was positive indicating that it is privately profitable to produce coffee Competitive advantage ratios were all less than 1 showing that the produce is competitive in coffee production Using a shadow exchange rate of US$1 = 17,103VND, domestic resources cost ratios were all less than 1 indicating that the Daklak province has comparative advantage in coffee production It was also noted that the Daklak’s comparative advantage is influenced by the exchange rate used, with a weakening of the local currency having an increase in comparative advantage.

Key words: Coffee, production, comparative advantage, domestic resource cost,

market and consumption

CHAPTER ONE INTRODUCTION

1.1 The necessity of the study

Vietnam is characterized by the dominance of the agricultural sector The reform process of Vietnam after 1980s has obtained significant achievements in agricultural production, shifting from a food shortage to be a large exporter of some agricultural products such as rice, coffee, pepper, cashews and rubber in the world market Among these commodities, coffee ranks second after rice in terms

of export value Vietnam is now the second largest coffee exporter in the world, with a share of about 15%, Vietnam also is the biggest Robusta coffee exporter in the world, with the world market share of 43% (AGROINFO 2008)

Vietnam is highly competitive as a coffee producer and exporter thank to a favorable climate and environmental conditions and low labor costs Over 90%

of coffee output is exported to nearly 60 countries However, Vietnam’s coffee fetches lower prices than those of the world average This can be explained by lower quality due to poor processing, drying facilities and post-harvest technologies, manifested in high moisture content

Moreover, in the context of trade liberalization, Vietnam’s economy is easily vulnerable to external shocks The collapse of the world market prices in the some last years has lowered export earnings in spite of continuous expansion

of Vietnam’s coffee export volumes While a shock stabilizing system is nearly absent or inefficiently operates, most of the risk is borne by the farmers This situation of the coffee industry is worsened due to the practice of non-zoned production causing an imbalance between demand and supply The large expansion of Vietnam’s coffee-farming area since 1994 partially explains the excess supply and the collapse of the world coffee prices in some last years This

is not the only for the coffee industry but also of some other agricultural products

in the transitional period of Vietnam towards market economy such as peppers and cashews

The collapse of coffee prices in the world market seriously hampers coffee farmers’ profitability in Vietnam in general and DakLak province in particular, which accounts for 53% of Vietnam’s coffee volume

With the recent trend of Vietnam to integrate international economic, agricultural production, which low cost and utilizes advantages and potentials of domestic resources, is vital for the economy in the context of intense competition Hence, recognizing the potential and un-favorable condition for the coffee product is crucial, which helps to develop policies to improve the competitiveness of coffee product To fill this gap in literature, I decided to study

“Comparative advantages of Vietnamese agricultural products: Case study of coffee product in Daklak province”

- Analysis of trade opportunities at global, regional and intra-regional levels;

- Suggest necessary policies to solve the difficulties utilize the comparative advantages and increase the efficiency of coffee production and consumption

in Daklak province

1.3 Research questions

• What is the efficiency level of coffee production in Daklak?

• What is the current advantage of coffee production in Daklak?

• How are the obstruction to the coffee production and consumption in Daklak?

• What are the solutions to increase efficiencies and comparative advantages of coffee production in Daklak?

1.4 Targeting and scope of the study

1.4.1 Targeting of the study

The targeting of study is coffee growing households, coffee traders and processors in Daklak province

1.4.2 Scope of study

The study focuses in analyzing the production situation and efficiency of coffee production in Daklak province, in the crop season 2008-2009

1.5 Structure of the report

This first chapter briefly introduction to the research, describes the necessary and objectives of the study

The second chapter describes justification of the comparative advantage theory and gives overview of coffee market globally, in Viet Nam and in Daklak province and some factors impact on coffee market

The third chapter introduces the site of research and methodologies to apply for this study

The fourth chapter gives the result of comparative advantage analysis and some main factors impact on comparative advantages of Daklak’s coffee Thereafter, gives some solution to increase comparative advantages for Daklak’s coffee product

Finally, conclusions and recommendations are presented in Chapter 5

CHAPTER TWO LITERATURE REVIEW

As justified in the Introduction, the first step of this study is a review of previous studies relating to the issue This chapter will first introduce the comparative advantage theory Thereafter, the chapter provides some discussions

on comparative advantage and competitive Moreover this chapter also provides opportunities and challenges of Vietnamese coffee in the global market, potential impact of liberals to Vietnam coffee industry and finally on how to link the trade liberalization on livelihood impacts

2.1 Comparative advantage theory

Comparative advantage: a conceptual of clarification

The concept of comparative advantage was originally introduced by

Ricardo to explain that the driving force behind international trade is not

“absolute” but “comparative” advantage That is event if autarky country has absolute advantage in all the goods (i.e., it can be produce all the goods more efficiently than other countries), it can still benefit from international trade through increasing specialization in the goods where it comparative advantage lies

In brief, a country has comparative advantage in the goods whose autarky relative prices (in terms of other goods) are lower than other countries Such lower autarky relative prices reflect that the country is relatively more efficient in producing these goods so that under free trade it would be better off allocating more resources to producing them and then exporting them to pay for imports of other goods with less production as a result of the resource reallocation

The concept of comparative advantage goes beyond the domain of international trade That “someone has comparative advantage in (doing) something” is a common remark often encountered in different contexts In general, an entity is considered having comparative advantage in one activity if it can do “relatively better” in that activity “Relatively better” does not mean that this entity must have a better performance in this activity than other entities;

neither does it mean that it must be better at this activity than other activities Indeed, comparative advantage is an intricate concept related to both of these two comparative dimensions and involving an entity’s performance in one activity, its performance in other activities, other entities’ performance in this activity, and their performance in other activities

Unless it is clear within a particular context, the two comparative dimensions

of comparative advantage need to be specified for it to be clearly meaningful For example, to say that “Brazil has comparative advantage in coffee farming” is vague; to say that “among all the possible agricultural plant, Brazil has comparative advantage in coffee farming” is a bit clearer; and to say that “among all the possible agricultural plants and relative to other Latin American countries, Brazil has comparative advantage in coffee farming” is the most plants

While it is difficult to precisely define what comparative advantage is, an alternative way to appreciate the concept of comparative advantage is to understand what it implies Following the original concept of comparative advantage, to say that a country has comparative advantage in one good implies that this country would have higher specialization in this good under free trade than in autarky Following a more general concept of comparative advantage, to say that a country has comparative advantage in one product implies that it is welfare improving for this country to allocate relatively more of its resources to producing this product than a typical country does Similarly, to say that a person has comparative advantage in doing something implies that it is more efficient for him or her to specialize more in this activity than an average individual does

In summary, comparative advantage is a concept characterizing resource allocation and specialization patterns

From an equilibrium point of view, the concept of comparative advantage characterizes equilibrium specialization patterns in the long run For example, observing the lasting pattern that coffee exports from Latin America and Southeast Asia have relatively high specialization in the US and Japan markets respectively, one can say that coffee producers in Latin America have

comparative advantage in exporting to the US market, while Southeast Asian coffee producers have comparative advantage in exporting to the Japan market From a dynamic point of view, the concept of comparative advantage explains potential changes in specialization or trade patterns For example, to say that an autarky country has comparative advantage in one goods implies that under free trade this country has tendency to increase specialization in that goods and export it In light of abundant yet underexploited agricultural resources in Sub-Saharan Africa, to say that Sub-Saharan African countries have comparative advantage in agricultural implies that it is welfare-improving for these countries

to promote agriculture development

Both the equilibrium and dynamic aspects of comparative advantage provide useful information: While the former reflects a country’s optimal specialization pattern in the long run, the latter indicates its short-term development priorities

It should be noted that “equilibrium” is always relative because under the influence of many changing factors, comparative advantage can hardly be invariant over time

Comparative advantage reflects the difference between benefits and (opportunity) costs A country can gain comparative advantage in an activity from an increase in the benefits provided by this activity or a decline in its opportunity costs Therefore, comparative advantage depends on both demand-side factors (mainly consumer preferences) and supply-side factors (mainly resource endowments and technologies); and a country’s comparative advantage

in one activity is not only determined by its competitiveness in this activity but also by its competitiveness in alternative activities

It is worth clarifying some common confusion between “comparative advantage” and “competitiveness” or “competitive advantage” There is no unanimous agreement on the exact definitions and the usage of these three terms Competitiveness is usually synonymous with a country’s (or firm’s) long-term performance (Buckley 1988) For example, in the “constant market share” (CMS) literature (Bowen 1984), a country’s competitiveness in a market is measured by its market share; the larger market share a country controls, the

greater its competitiveness in that market would be However, there have been controversies over whether it is meaningful to talk about the competitiveness of nations (T.Yap 2004) In response to concerns that the US may lose from international competition under free trade, some trade economists argue that it is inappropriate to view each nation “like a big corporation competing in the global marketplace”; rather, international trade is “not a zero-sum game” but one that allows all the players to gain from exploiting their respective comparative advantages Competitive advantage usually refers to a country’s (or firm’s) characteristics that give it competitive edge to enhance its competitiveness (Porter 1990) While competitive advantage and comparative advantage are often used synonymously, they are sometimes used in parallel for denoting different concepts For example, in some empirical studies competitive advantage is used

to measure profitability under market prices that could be distorted by policy or other non-market forces, while comparative advantage is used to reflect profitability under “shadow” prices that reflect the social value of resources

2.2 The common features of international agricultural market

2.2.1 An overview of the world market

2.2.1.1 Supply and demand

Coffee cultivation is restricted to the tropics and invariably also developing countries due to the organic demand of the coffee trees Coffee producers of the world are South American, Asian and African developing economies The largest coffee exporters in the world in the period of 1990-2001 are Brazil, Colombia, Mexico, Guatemala, Cote d’Ivoire, Costa Rica (South America), Uganda (Africa), Vietnam, Indonesia, India (Asia) in which Brazil always rank first in the list of largest exporters with the market share of around 25% Colombia used to rank second in this list for a long time, however, since

2000, this position has been occupied by Vietnam, a new entrant in the world coffee market The world coffee production was growing at 3.7% per annum in the period of 1991-2000

While coffee is planted in developing countries, most of world consumption of coffee takes place in industrial countries Large markets for coffee consumption are Europe, USA and Japan Europe market with annual consumption around 2 million tones accounted for over 40 percent of total global demand The US accounted for 24 percent of total consumption and Japan for over 10 percent (ICO)

In contrary to large coffee consumption in the industrial countries, coffee consumption in exporting countries only explains for above 20% of world demand A half of the 20% come from domestic consumption of Brazil, where domestic consumption account for 40% of its production

Demand is slowly growing at 1.5% per annum only, a lag behind supply While Coffee consumption grew rapidly outside of Europe and USA at annual rates of nine percent in 1990s (Kaplinsky 2001), consumption in the traditional importing countries is showing of plunge The slow growth of coffee consumption in the context of the expansion in coffee production has caused very low coffee prices in some last years

2.2.1.2 Coffee price movements since 1960s

A disturbing characteristic of world coffee market is the prevalence of high degree of price instability The variability also takes place from year to year, within each year, even each month One measure of price volatility, coefficient of variation, shows a high inter-year variability of 48.6% in the ICO composite indicator price in the period 1965-2001 The intra-year variability is averagely 10.6% in the same period The intra-month of July 2002 is 3%

It is well known that the high volatility in coffee price is primarily caused

by supply shocks rather than demand factors Historical evidences showed that wide changes in coffee price were occasionally related to frosts and droughts in Brazil, the largest coffee exporters in the world The most significance was the frost in 1975, drought in 1985 and frost in 1994 severely marked upward pressure on the world coffee price

In contrary to driving-up-price impacts of these negative shocks, production hikes are matched by price falls in the world market Changes in the world price as a result of supply shocks are in opposite direction to changes in world production The transfer of supply shocks to price shocks is immediately, however supply response to price can take place with some delay High price expectations can lead to higher production from existing trees by better attending only, while the new plantation is related to a long gestation period of three to five years Therefore, it takes several years for supply to response to high prices This

is also inferred by positive correlation indices of evolution of the world production and international coffee prices lagged These indices are 0.53, 0.57, 0.61, 0.63 and 0.63 respects to prices lagged by one to five years The three latter

is rather higher implying larger pricing response of supply in long term than short term

Downward trend of world price is another characteristic of the price movement Except for some occasional price-rising events resulting from both human-made and environmental interventions, there has been a systematic long-term decline in coffee’s terms of trade Supply is going at 3.7% per annual; consumption is only going at 1.5% The oversupply has led to long-term pressures on coffee prices (Nyoro October 2002) Although the combined prices

of the four main categories of traded coffee grew from about 40 US cents/lb in the mid 1960s to around 45 US cents/lb in 2001, real coffee prices in terms of trade (adjusted by inflation) as pointed out in Kaplinsky (Kaplinsky May 2001) fell sharply, to a level of around half that of the mid 1960s (and around 20 percent of peak market values in 1977) Seriously, the coffee price of 2001 did not cover total costs of producers

2.2.2 Impact of liberalization on coffee product

Historically, the long-term behavior of coffee prices has been highly cyclical in nature These cycles are primarily caused by fluctuations in supply, rather than changes in demand, which is relatively stable A typical price cycle

is disrupted by a major climatic event (for example, a frost or drought) The consequent reduction in supply leads to a sharp rise in prices, stimulating producers to make new plantings However, the new trees take three or more years to come into full production, prolonging the period of high prices and continuing to encourage plantings When the new sources of production come on-stream simultaneously, prices crash because of oversupply Prices then continue at depressed levels until sufficient marginal land is taken out of production, a process that usually takes some time since coffee is a perennial tree and not an annual crop

From 1963 to 1989, the amplitude and duration of these price cycles were constrained by market regulatory mechanisms (export quotas and other measures) administered by the ICO From 1989 onwards, the coffee market, like many other primary commodities, has been free from regulation The period of uncontrolled markets has been characterized by greater medium-term price volatility than under the regulated market As a result of a severe frost in Brazil

in 1994, prices rose by some 118% between 1993 and 1994 It is interesting to note that, with replanting, production by 1999 had risen by 35% relative to 1994 and prices had dropped by 38% (April 2008)

The ensuing coffee price crisis began in 2000 and continued until the end

of 2004 During these five years many coffee producers were unable to cover their production costs and only continued to produce coffee because of the lack

of alternatives or because they still cultivated subsistence food crops The effects

on farmers included an exacerbation of poverty in coffee communities worldwide, with additional social effects such as migration to urban areas, illegal emigration, and cultivation of illicit drugs With respect to the balance of payments, earnings by coffee producing countries slumped by more than 50% implying losses in earnings in excess of US$30 billion On the other hand, it is worth noting that the coffee market in industrialized countries continued to be relatively healthy with steadily rising retail sales, particularly in terms of value

Since 2004, coffee prices have recovered considerably and reached levels last seen in 1998, with export revenue of producing countries in coffee year 2007/08 estimated at US$15.2 billion (IOC 2010) However, this strong performance is unlikely to continue in the near future as a result of the impact of the global economic crisis that began in September 2008 No sector has been spared from the current financial turmoil, which has already caused a substantial slowdown in most industrialized countries Governments around the world are trying to contain the crisis, but many analysts suggest the worst is not yet over Coffee prices have been badly affected, having fallen by almost 20% between the end of August and the time of writing

Effects of the financial crisis on coffee consumption early reports show that food sales are behaving better than those of non-food products In markets in North America, Europe and Japan, which are responsible for approximately 58%

of world consumption, coffee is a staple good that accounts for only a small fraction of consumer spending The available information suggests that coffee consumption is holding up well in these markets Instead of reducing overall intake, the response of consumers is more likely to consist of a shift from out-of-home to in-home consumption and from higher cost products to cheaper brands This trend to less expensive products is corroborated by the strong results reported by discount food retailers in late 2008

In coffee producing nations, which make up more than 26% of world consumption, the situation is more diverse In some countries, prices of coffee have fallen in local currency and consumption may therefore be stimulated Meanwhile, in Brazil, the largest coffee drinking market among producing countries, the devaluation of the exchange rate has maintained prices of green coffee at pre-crisis levels As a whole, consumption in these countries is not expected to suffer any major negative impact

The third major component of coffee consumption comprises emerging markets, mainly in Eastern Europe and Asia The position here is less clear Purchasing power is more limited than in developed countries, and coffee

consumption is not as strongly entrenched Cutbacks in coffee purchases may occur in case of widespread unemployment and economic instability

Impact of the economic crisis on coffee production

Over the past two decades, coffee production has been marked by considerable gains in productivity However, we have also witnessed large increases in production costs, mainly due to rising prices of key inputs, such as fertilizers, transportation and labor Even at the higher prices prevailing before the onset of the crisis in September 2008, producers, especially those of Arabica coffee, were hard put to cover their costs and had little incentive to invest in new plantings Current levels of production are sufficient to meet demand but not the rise in consumption forecast for the future

In some instances, pressure on costs is likely to ease Significant declines

in prices of oil and fertilizers have taken place in recent months The impact of these price decreases on production costs is likely to be subject to a lag, since many of these inputs are purchased well in advance However, it is not expected that labor costs will fall to the same extent Even if unemployment rises, thereby increasing the incentives to work on coffee farms, past pay increases are often enshrined in national minimum wage agreements and will remain unchanged

A key component in the response of individual countries will be exchange rate policy The devaluation of the US dollar in recent years had a major impact

on profitability in key coffee producing countries, such as Brazil and Colombia This trend prevented growers in these countries from reaping the full benefits of the recovery in coffee prices since 2004 On the other hand, producers in countries with currencies linked to the US dollar, such as Vietnam, were able to take advantage of higher prices on the international market The situation is now likely to be inverted In countries with flexible exchange rates, price falls in the international market have been (at least partially) compensated by exchange rate movements and the price of coffee in local currency has not changed significantly In countries whose currency is more directly linked to the US dollar, the impact of recent price reductions on the terminal markets are directly transmitted to growers In fact, currency movements have become a driving force

in the price behavior of futures markets for many commodities, and coffee is no exception

World trade

On a macroeconomic level, export revenues from coffee are expected to fall Over past decades, most producing nations have diversified their economies and reduced their dependence on coffee as a generator of foreign exchange Even

so, the crisis will affect more strongly some countries where coffee still represents a significant share of export earnings, notably Burundi (52%), Ethiopia (31%), Honduras (23%), Uganda (17%), Nicaragua (17%) and Guatemala (12%)

In the international coffee trade, new constraints due to the new economic climate have arisen: retailers have become more cautious; consolidation is taking place; economic agents are seeking to diversify even more their client base; and hedging has become more expensive

Some disruption to normal trade patterns was reported at the beginning of the crisis, but the situation appears to be returning to normality Meanwhile, the persistence of barriers to trade in some importing markets, particularly in the form of tariff escalation affecting processed coffee, continues to impede full access to markets by a number of coffee producing nations

In summary, early evidence suggests that the current financial crisis will have a significant impact on coffee consumption With regard to production, effects are likely to differ considerably among countries However, whatever the response, there appears to be no change in the underlying reality of the world coffee market: prices remain at levels that do not reward much-needed investments in future production At the same time, in the current context of a fine balance between supply and demand, any disruption to production is likely

to trigger a new cycle of high prices and overproduction

2.2.3 Opportunities and challenges for Vietnamese coffee product

Opportunities

International economics integration has created significant opportunities for Vietnam’s agricultural to take the use of comparative advantages in term of natural, ecological condition for the development of farm high competitiveness products Coffee is one of these agricultural products Though it is a late entrant

to the world market, Vietnam penetrates and grows fast in these markets, of which difficult ones such as USA, EU member-countries Obviously, proactive integration done during the last 10 years indicates impressive growth of Vietnam’s coffee sector and particularly the increased benefits (of hundreds of million US dollar every year) brought about by its exports; created jobs and higher incomes for coffee producers as compared to these generated by production of other corps such as rice, sweet potato, green bean, etc

Increasing competition experienced during the last years has accelerated the organization, rationalization production chains, including growing, processing, and trading coffee in the direct of improving quality, effectiveness of its operations and development of relations among various stages of the production process to for open-end value chain This chain is closely linked with clearly operation principles that are followed strictly by involved actors such farmers, cooperatives, firms and trading organizations, etc this impact, initially, has settled down to hot development of coffee area, rationalized the allocation of processing firms, better organized after harvest work, improve trading and closer linked to changes in the world market

Challenges to be overcome

The rapid expansion of production is a strong point of Vietnam coffee industry but leads to some imbalances that need to be urgently taken into account:

- Imbalance between production and processing

Because the total area under coffee has been growing too quickly, the amount of ripe cherries to be picked and processed has also been annually soared

at an amazing speed Thus, the need of more drying yards, processing stations, advanced technologies and equipments cannot be significantly satisfied, that leads to lower quality and cannot meet the requirements of the market However, much has been done to tackle with this bad situation

- Imbalance in product structure

To be based on the geography of Vietnam, it is great potential for us to grow a rather large amount of Arabica coffee in the North Yet the output of Arabica is still making up a very small part in the total production, which results

in the product structure imbalance

As every one knows, most of Vietnam’s last year production of 750,000 tons is taken up by Robusta Meanwhile the price of Robusta has been sinking much faster than of Arabica Vietnamese coffee industry is therefore facing a bigger lost and finds itself in need of making some changes to be adapted with this ever-changing international market

- Imbalance between production development and market expansion

Every year Vietnamese coffee is imported by over 59 countries and territories all over the world, including big markets as the USA, Germany and

EU member countries However, with such a big annual production of over 10 million bags, much more attention should be paid to the issue of market expanding, both domestically and in other potential markets

2.3 Overview of previous research

There were a lot of researches about comparative advantages of not only Vietnamese agricultural product but also productions of other countries Take some previous researches as an example

Competitiveness of food processing in Vietnam: a study of rice, coffee,

seafood and fruit and vegetables sub-sectors Author Nicholas Minot,

International Food Policy Research Institute, Washington, DC, 1998 This

report examines the competitiveness of the food processing sector in Viet Nam, focusing on four sub-sectors: rice milling, coffee processing, seafood processing,

and fruits and vegetables The rationale for the study is that Viet Nam, as a member of the Association of South East Asian Nations (ASEAN), is obliged to follow the trade liberalization schedule defined by the ASEAN Free Trade Agreement (AFTA) Under this agreement, Viet Nam will have to reduce the import tariffs on almost all goods imported from ASEAN members to less than 5 percent by 2003 An important question for the government is how trade liberalization is likely to affect the food processing sector and what steps can be taken to make the transition a successful one

A review of comparative advantage assessment approaches in relation

to aquaculture development of author PingSun Leung and Junning Cai,College

of Tropical Agriculture and Human Resources, University of Hawaii at Manoa, October 2005 This paper appraises two approaches commonly used in the economics literature for comparative advantage assessment One is the “domestic resource costs” (DRC) approach; and the other is the “revealed comparative advantage” (RCA) approach Several aquaculture-related empirical applications

of the DRC and RCA approaches are reviewed Finally, the respective merits and problems of these two complementary approaches and how they could be used to provide policy guidance are also outlined

Products with competitive potential in African agriculture Author

Dorina Minoiu, Rome, 2003 This study is intended to: Firstly, identify by region and country potentially competitive crop, livestock, forestry and fishery products that not only could meaningfully advance food security and reduce poverty on the African continent, but also significantly improve its world and intra-regional trade prospects Secondly, identify broad areas of action and types

sub-of investment to develop selected potentially competitive products, based on the analysis of underlying agro-ecological and socio-economic constraints in each sub-region

CHAPTER THREE SITE AND METHODOLOGY OF RESEARCH

This chapter presents briefly the site and methods used in this study to data collection and analysis A clear explanation is made of what and how the study collected information as well as analyzed the data

3.1 Overview about research sites

3.1.1 Natural conditions

Dak Lak Province is in Central Highland in 400 - 800m high above sea It has border with Gia Lai

in the north and

east-north, Lam Dong

Province in the south,

Cambodia and Dak

Nong Province in the

west, Phu Yen and

Khanh Hoa provinces

in the east

Dak Lak has a

large natural area

35% the province's

area is 1,000 - 1,200m

high mountain area

while the Buon Ma

Thuot Highland occupies 53.5% The rich, flat red soil is a great advantage to develop long term - industrial trees like coffee, rubber, tea, and pepper , to raise cattle and to grow forest Alluvia soil is rice paddy and natural grass field Dak Lak's forest has abundant wood reserve and various rare animal species as elephant, lion, tiger, beer There are many beautiful rivers, high waterfalls and lakes

Figure 1: Daklak province map

Climate: The Dak Lak's climate is temperate with the annual average

temperature is 24ºC There is a difference of only 5ºC between the hottest month and the coldest one The dry season lasts from November to April next year It is quite cold, windy, and dry The rainy season lasts from May to October with high rainy amount It is located in a tropical region with adequate moisture, temperature and light for the growth of many kinds of crops In the dry season, Dak Lak's weather is not very cold, with enough sunlight for planting many crops and drying many agricultural products Having two separate seasons facilitates crop growth With most of its basal soil having advantageous qualities such as a fine texture, a high water absorption level, and high fertility, Dak Lak is well-suited for the development of various industrial crops including coffee, rubber, pepper, and cashew, as well as short-term crops such as hybrid maize and cotton

3.1.2 Socio-economic conditions

In the recent years, the government has invested and introduced several polices to encourage the development of the region and improve the life of the people and ensure security in the Central Highland in general and Daklak province in particular Thank to support from the government and the great efforts of the people living in there, the province has been able to achieve high economic growth during 1990- now The average economic growth rate in Daklak has been higher than national average with the rate was about 8.2% per year for the 1990-1995 periods This rate increased to 11.5% for the years 1996

up to now (Whereas the national rate was around 7% per year) Agricultural particularly experienced the growth rate of 7.5% per year, much higher than the national rate of 4.5% per year The life of ethic minorities has been improved and poverty rate has reduced significantly GDP per capita rose from 90 USD in 1990

to 743 USD in 2008

3.1.3 Roles of coffee production in DakLak province

The natural conditions of Daklak province (including, climate, land, and weather) are very suitable for coffee production especially Robusta coffee With

Picture 2: Coffee production areas in Dak Lak

Province

these favorable conditions, Daklak has become the main coffee production region

in not only Central highland provinces but also the hold country, with total areas coffee plants and total output of the province occupied 47%-55% of these of the hold country (Source: VICOFA)

trees have become

the main income

income and thank to

income from coffee

trees Daklak’s

economy has

developed, the life of population has improved, and poverty rate has reduced approximately 4% annually from 1990 to 2005 Source:(Daklak 2008) Especially income gap between deferent groups of people have been narrowed (from 17times in 1995 to 6.5 times in 2005)

The table 1 shows that, the coffee area plays an importance role in industrial crops proportion of Daklak Coffee plant accounted for over 70 percent of perennial industrial crops, followed by cashew and rubber with approximately 16% and 10% respectively

Map scale: in hectare

Source: Ministry of Agriculture and Rural Development (MARD)

Table 1: Planted area of Daklak perennial industrial crops

24,877 9.77

- Pepper

3,567 1.53

4,417 1.79

4,716 1.85

4,703 1.85

4,712 1.85

- Cashew

35,505 15.24

41,675 16.37

528 933

Source: DakLak Official Statistics Department

3.1.4 Households selection

Coffee bean in Daklak province, Vietnam is selected in this report The selection is base on the flowing criteria Daklak is not only the largest producer but also has the best coffee bean quality as well as highest productivities in Vietnam Therefore, study on comparative advantages of Daklak’s coffee can behalf for Vietnamese coffee

Base on real coffee cultivation situation in Dak Lak province, it can be divided into three regions: and after discussions with officials of the Dak Lak Department of Agriculture and Rural Development (DARD) and consideration of relevant socio-economic factors, including poverty levels, one district from each region was chosen:

• Region 1: Krong Pak district, with the highest coffee productivity area in

the province (17,341 ha and productivity is just over 2 tons per hectar) and the highest living standard when coffee prices were high;

• Region 2: Buon Don district, with the smallest coffee plantation area in

the province (2,780 ha); it is one of the poorest districts in this region,; and

• Region 3: Krong Buk district, one of the largest coffee plantation ereas in

the province (21,156 ha of coffee)

In each district, one commune with a relatively large coffee production area was selected:

• Ea kenh commune, Krong Pak district; with 30 households were selected

by randomly

• Ea Nuol commune, Buon Don district; with 40 households were chosen and

• 30 households in Ea Hieo commune, Krong Buk district

After discussions with commune officials, three villages in each commune were chosen, with priority given to sites with a higher percentage of Kinh people Over 90% of households interviewed were Kinh and 10% of households interviewed were ethnic minority people

3.2 Data collection method

3.2.1 Desk study

The study started with a review of the literature relating to the topic to understand and show how this research is linked to former research in this field After that, the study collected and reviewed papers relating to market regulations, coffee standard assessment reports, experiences of other exporting countries, world as well as domestic coffee market After reviewing, synthesizing and analyzing data and information from these papers, the study developed some propositions on what might happen at macro level to coffee industry in Vietnam

in general and Daklak in particular

3.2.2 Primary data

One hundred households and enterprises interview were carried out to get the data of the production costs, the advantages and disadvantages of fig production and consumption of the households in the Dak Lak province

3.2.3 Secondary data

Secondary data on the coffee industry were collected from several sources including the General Statistical Office, Ministry of Agriculture and Rural Development, Custom Department, Dak Lak Department of Agriculture and Rural Development, VICOFA, VINACAFE, reports, books, academic papers, articles, databases, and websites related to the coffee industry in Vietnam

3.3 Methods of Comparative assessment

3.3.1 Production Functions (Cobb Douglas)

This thesis will use Cobb-Douglas production function to analyze and identify input factors that influence the productivity, out put and the efficiency of coffee Cobb-Douglas production function is carried out by analyzing the

primary data on the software Minitab 15 The results of Cobb-Douglas

production function identify how each input factor impact to productivity and efficiency of coffee production in Daklak province

The Cobb-Douglas production function of Coffee is illustrated as the following

Comparative advantage analysis is the framework that allows the analysis

to determine the economic profitability of an activity Base on that, analysis can compare real or economic cost of domestic production to international price references The purpose of this is to determine whether country can gain from trade, which is very important for market economies in the era of economic integration

Gain from trade are a result of exploiting the gain productive efficiency arising from countries or regions concentrating on what they do best (produce most efficiently or at least cost) and trading products for these goods (and

services) for which this region or country is less efficient (making domestic production more expensive)

The main method to determine the comparative advantage is Domestic Resource Cost (DRC) Domestic Resource Cost (DRC) analysis is a tool that assesses the benefit/costs of either importing or producing the product in the domestic market According to the comparative advantage principle, countries better special export goods that they can produce at relatively lower costs than other, and gains from trade will improve welfare of the economies

Or

Domestic resource cost compares the opportunity cost of domestic production with its incremental values Formula (Tsakok 1990) is represented as follows:

Where:

aij, 1….k: coefficients of trade input

aij,, k+1,….,n: coefficients of domestic resources and non-traded inputs

Vj: shadow price of domestic resource costs

Domestic and non-traded input value at opportunity

cost (Net foreign exchange) earned or saved by producing

the good domestically

DRC =

Domestic resources valued at social prices

Revenue minus cost value at social prices

n k

j

i a P P

V a

11

Pfi: Foreign coffee price (FOB price)

Pfj: Foreign price of inputs (CIF price)

A DRC ratio of between 0 and value of shadow exchange rate (SER) (or DRC/SER<1) shows that by producing coffee domestically the countries save foreign exchange rate, and hence the country has comparative advantage in producing coffee If, on the other hand, DRC/SER>1, it implies the country incurs cost in producing coffee locally in excess of what it could cost to import coffee If country can gain by producing coffee locally for export, with outputs and inputs valued at their opportunity cost, then it is competitive internationally

in the production of coffee At special case, if DRC/SER =1, the country is neither gain or lose from producing coffee Table summarizes the interpretation

DRC/SER=1 The economy neither gains nor saves

foreign exchange through domestic production

Economy on balance

0<DRC/SER<1 Value of domestic resources used in

production is less than value of foreign exchange earned or saved

Comparative advantage

DRC/SER>1 Value of domestic resources used in

production is greater than value of foreign exchange earned or saved

3.3.4 Policy analysis

The comparative advantage position of agricultural commodities is also influenced by government policies related to agricultural inputs and resources such as capital, land, water and labour Detersive policies on agricultural inputs include value-added tax and import tariffs on imported inputs The domestic input industry in Vietnam is protected on a wide range of tariff lines related to agricultural inputs Therefore, policy analysis was used to analyze the impact of these policies on cost of coffee production

3.4 Research Parameter

3.4.1 Domestic resource cost

Where:

aij, 1….k: coefficients of trade input

aij,, k+1,….,n: coefficients of domestic resources and non-traded inputs

Vj: shadow price of domestic resource costs

Pfi: Foreign coffee price (FOB price)

Pfj: Foreign price of inputs (CIF price)

3.4.2 Cost and Price of coffee product

Cost use to analyze in this thesis will be (FOB, CIF price)

FOB = Free On Board CIF = Cost, Insurance & Freight FOB = (Production Cost+Profit+Expenses) + Transport to the Port of Origin Costs

n k

11

CIF = FOB + Freight from port of Origin to the Port of Destiny + Insurance

3.4.3 Some other parameters

VA = GO-IC

MI = VA- Depreciation Where:

VA: Value added IC: Intermediate cost

GO: Gross output MI: Mix income

3.5 Limitations of the study

During the time of the research, the study had some certain difficulties First, there were some constraints when working in the field such as insufficient data and interviewed people Due to time and budget available, the study only conducted the participatory methods with different groups of households, private traders, farmer unions, local authorities and extension staffs It would have been better if the study could do the techniques with other actors relating to coffee value chain in the local coffee market such as some middlemen or even some state-owned companies or private companies to cross-check and have a broader view of the issue Besides, the limitation of time and resources also prevented the study to investigate more information on the comparative advantage of coffee That’s the information on: What percentage of coffee

in Daklak province was exported and to what countries? How much is consumed in domestic market? What percentage of Vietnam coffee with trade mark is exported and where are the destinations? How much percentage is coffee from other countries (instant coffee…)? If such issues had been addressed in this study, the analysis for impact of change in the market for farmers would have been more critical

CHAPTER FOUR RESEARCH RESULT AND DISCUSSION

This chapter provides a brief overview of the global coffee market, trends and shifts in terms of production, prices, supply and demand Moreover, this chapter also provides the main method to assess the comparative advantage of coffee product in Daklak of Vietnam, the main factors impact on comparative advantage of coffee product

4.1 Overview of the production, consumption and trade of Vietnamese

Coffee

4.1.1 Overview of coffee production in Vietnam

The coffee tree was introduced into Vietnam by the French during the 1850s and coffee was exported mainly to France By 1975, total coffee plantation areas in Vietnam were about 20,000 hectares With the capitals from bilateral agreements with socialist countries, investment in coffee was started to be focused, particularly in central highland provinces especially Daklak province In

1980 Vietnam exported about 6,000 tons of coffee from total plantation areas of amount 23,000 hectares The areas increased from 119,000 hectares in 1990 During 1990 to 1994, low coffee price in the world did not change much the plantation areas, which increased just only 10,000 hectares every year In 1994 total plantation areas was 150,000 hectares, representing 1.32% of total plantation areas of all crops in Vietnam During this time total coffee production output in the world reduced significantly due to the reduction in plantation areas

in Brazil, which was the biggest coffee producer and exporter in the world, because of frost This pushed up the coffee prices in the world market significantly and strongly encouraged the Vietnamese farmers to expand the plantation areas In 2000, total coffee plantation areas was 520,000 hectares, accounting for 4.14% of total plantation areas of all crop in Vietnam and stood in the third position after rice (61.4%) and maize (5.7%) with total output of 800,000tons of coffee So during the 1994-2000, there was a quick growth of

coffee sector with the areas increasing at about 23.9% per year and output increasing at about 20% per year (especially in 1994, 1995 and 1996 where the output increased by 48.5%, 48.5% and 33% respectively) Currently, coffee trees are planting in several region in Vietnam, such as, Ha Giang, Yen Bai, Binh Duong, Dak Lak, Gia Lai, Lam Dong and so on (Source: MARD)

One of the main reasons for coffee production increased rapidly in Vietnam in the last 15 year was the rise in coffee prices in the world markets, which significantly increased the profits from planting and exporting coffees In the mid of 1990s, coffee prices in the world strongly increased from 903USD per ton to 1,873 USD per ton in 1994 and reach a peaked at 2,411 USD per ton in

1995 This development had big impact on domestic production of coffee in general and Daklak province in particularly In 1994, 1995 and 1996, total coffee output increased by 48.5%, 48.5% and 33% respectively (Source: Information Center-MARD) In 1995 the whole country had 186,400 hectares of coffee with the total output 281,100 tons Vietnam, Brazil and Columbia are now the largest three coffee exporters in the world (Source: statistic yearbook)

Only small proportion of Vietnamese coffee was consumed domestically and approximately 95% was exported Vietnamese coffee has been exported to

59 countries Vietnam currently is the largest Robusta coffee exporter and the second largest (after Brazil) among the 10 largest coffee exporters in the world Contributed in this result, Daklak’s coffee occupied 43-47% of total Vietnamese coffee Coffee has also been one of the main export crops not only in Daklak but also in Vietnam with total export revenue around 400 to 600 million USD, or around 25-27% of total agricultural export (after rice) and about 6-10% of total revenue of Vietnam (source: VICOFA, information center The data is shown in the table 2